States could enforce payment on special revenue bonds – Conference Coverage

17 May 2019

A US Appeals Court’s ruling on Puerto Rico’s special revenue bonds will reverberate throughout the municipal bond market, panelists said today at a meeting of the Municipal Analysts Group of New York (MAGNY).

Jim Spiotto, a managing director at Chapman Strategic Advisors, said that, while the court case should be overturned, there is no guarantee there will be a rehearing or that the US Supreme Court will hear the case.

On March 26, the United States Court of Appeals for the First Circuit ruled that municipalities’ payments on special revenues bonds are optional while the issuer is in bankruptcy restructuring.

“If we can’t quickly get this reversed through rehearing or [writ of certiorari] then we ought to think about the model state statute,” Spiotto said.

But under bankruptcy law, the state has the power to control its municipalities, including expenditures, which would include payments on special revenues, Spiotto explained.

“If the [state] says ‘you must do this,’ then that meets the voluntary payment principal from the First Circuit,” he said.

Also, the bankruptcy court cannot interfere with a municipalities’ use of its revenues unless the municipal consents, but if a payment is mandated by state law, the municipal would not be able to consent with the court, Spiotto explained.

As for Puerto Rico, the nation needs to establish an economic plan going forward to garner investment and access capital markets, Spiotto said.

Other panelists offered more direct criticism of the nation’s government.

“It’s quite dubious as to if Puerto Rico is politically mature for self-governance,” said Howard Sitzer, a senior municipals analyst at Credit Insights, saying it spends too much on government programs, such as education.

“They got to be cognizant of their exit strategy because sooner or later, unless Puerto Rico’s government is reformed and the politics are removed, its administration of public agencies and delivery of government services are going to be back in this circumstance,” Sitzer said.